How Did 'Sell in May and Go Away' Work This Summer?

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Is there any validity to the strategy of selling in May and going away? More importantly, how would following this old saying have affected your portfolio this year?

The saying originated as "Sell in May and go away. Stay away till St. Leger's Day," and it was based upon the concept that in England, the financial movers and shakers didn't return to the market until the end of horse racing season, traditionally St. Leger's Day, in mid-September.

Over the years, the concept became Americanized by dropping the "St. Leger's Day" reference and creating a narrative that involved brokers and money managers going to the Hamptons for summer vacation and not returning until after Labor Day as its underlying rationale.

Five Decades of Analysis

As investors, we're always looking for ways to improve our returns, so how has this strategy performed? Surprisingly well, as least since 1950. A consistent strategy of being out of the market during the summer far outperforms a strategy of being invested for a full 12 months out of the year.

In the last 10 years between the first market day of May and the first market day after Labor Day, the market was down 60 percent of the time, either flat or slightly up 30 percent of the time, and significantly up only 10 percent of the time.

But as they say, there are exceptions to every rule, and 2014 was definitely an exception. By almost any metric, you would have lost out on some hefty gains by sitting out the summer this year.

During that period, the exchange-traded funds SPY (SPY) and QQQ (QQQ) -- which track the S&P 500 (^GPSC) and Nasdaq (^IXIC) indexes respectively -- were stellar performers. SPY rose 6 percent, and QQQ was up a whopping 14 percent during the "stay away" period. Looking at individual stocks, it only gets worse, or better, depending on how you invested.

You would be hard-pressed to find any stock from the Most Widely Held list that didn't rise significantly between May 2 and Sept. 2 of this year, with Bank of America (BAC) adding 8 percent, Ford (F) 10 percent, Disney (DIS) 15 percent, Apple (AAPL) 25 percent and Netflix (NFLX) a staggering 45 percent. Even among the few losers, the losses were small, such as Exxon's (XOM) barely 2 percent decline.

Consider the Industries

If you do find stocks that declined significantly during that period, it is most likely that they, or the industries they are in, had already been in longer-term down trends, and their summer losses were just continuations of those larger moves.

So should you incorporate the "sell in May" strategy into your investing? The answer seems to change based upon the type of overall condition of the market. In the case of a bear market, or even a flat market, it seems as if statistically speaking you should exit in May, or at least pare down your holdings, and re-enter after Labor Day.

But in a bull market, especially like the raging bull market we have been experiencing for the last few years, it seems as if the better strategy is to stay invested during the summer. The odds say that at worst you will be flat or down slightly, but the overall bullish nature of the market may actually cause you to continue to get a good return on your stocks.

For example, the current bull market is generally considered to be about five years old, beginning after the S&P 500 bottomed in March of 2009. If you had "sold in May" in the years since, the periods where you were out of the market would have been either flat, slightly up, or slightly down -- in essence negligibly effecting your return -- for four out of five of those years. But by being out of the market this summer, you would have missed the massive run alluded to previously, which would have added substantially to your overall return.

The Lund Loop is a free once-weekly curated slice of what I am writing, reading and hearing about in the stock market, finance and tech.

10 Financial Rules You Should Break
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How Did 'Sell in May and Go Away' Work This Summer?

This is the granddaddy of them all. Start to type "emergency" into Google (GOOG), and the first suggestion is "emergency fund." The rule is to make sure you have six month's of living expenses tucked away in cash in case you losefyour job or suffer a financial setback. Of course it's important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you'd be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.

For years, I've broken the mold on this financial rule by telling clients they shouldn't have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don't need the cash –- and these emergency fund accounts are rarely used –- you can still make money on the assets.

Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don't blindly dump money into your 401(k) if you don't have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job. 

​Also, if your employer doesn't provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.

You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation -- income. I'm a proponent for living within one's means, but too often that creates an artificial barrier or ceiling. "This is what I make, so I have to cut back to save more," is often the thought process. Rather than living within your mean, work on increasing your means.

There are many ways you can make more money, including asking for a raise, boosting your skills –- your human capital –- and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.

You should only save for your children's education if you can afford it. That means when you're on track to having enough assets for your retirement. Assuming you have the retirement assets and now want to save for college, most advisers will recommend a 529 college savings account.

Not so fast. These 529 accounts have some real advantages, such as tax-free growth of contributions if they are used for approved higher education expenses. This tax-free growth is a big benefit. However, if you withdraw money from this account and do not use it for approved higher education expenses, the gains will be subject to ordinary income tax and a 10 percent penalty.

The big risk is if you fully fund your child's college education but he or she decides to not go to college, drops out, finishes early or goes to a less expensive school. You have the ability change the beneficiary to another qualifying family member without penalty, but if you have just one child, there may not be anyone you can transfer the funds to. You would then have to liquidate the account and pay the tax and penalty. If you are undeterred and still want to pay for your child's college education, start with a small contribution into the 529 and fund up to a maximum of 60 percent of the cost in case one of the above scenarios occur.

The average age of cars on U.S. roads is 11.4 years. So if you're average, then it may make sense for you to buy a car -– especially a car a year or two old –- instead of leasing. However, if you do not intend on driving the same car for over a decade, a lease may be a much better option. A new study by found it was better to lease than buy based on its criteria. And under certain circumstances, you may be afforded a larger business deduction with a lease compared to a purchase.

The certified financial planner designation is the gold standard when it comes to financial planning. I wouldn't think of hiring a financial planner if they weren't a CFP practitioner. However, just because you are working with a CFP doesn't mean you shouldn't research your adviser, his or her areas of expertise and how he or she charges. The CFP tells you he or she has advanced training in areas related to tax, investing and retirement planning; has passed a comprehensive and difficult exam; and has agreed to adhere to a high code of ethics.

The onus is on you to know what you need and to make sure your CFP financial planner can deliver. Don't get lulled into thinking that just because he or she have three letters after his or her name that he or she has been screened. Ask tough questions before you trust your money to anyone -– even a CFP.

Most financial pundits will advise taxpayers to have just enough taken out of their paycheck so when April 15 comes around, they will neither owe money nor receive a refund. The rationale is if you get a refund from the Internal Revenue Service, it means you paid too much in over the year -- and the government has had use of your money without paying you any interest. Keep the money and invest it yourself is the theory.

'Again, that's the theory, but reality is much different. It all comes down to psychology. I look at paying a bit more to the IRS as a forced and automatic savings account. Sure you won't earn interest, but human nature tells us you probably won't save the money anyway. There is a greater chance you will squander $100 a paycheck then if you receive a $2,400 check from the IRS. One approach takes a plan and discipline each month to save and invest while the other doesn't. A check from the IRS isn't an interest-free loan; it is an automatic savings plan.

Nobody wants to endure an IRS audit, but too often I see honest and ethical taxpayers avoid claiming certain deductions or taking certain positions that are completely legitimate because they fear it will increase their chances of an audit. First, your chances of being audited are small –- about 1 in 104 chance. If your return doesn't include income from a business, rental real estate or farm, or employee business expense deductions, your chances are even smaller -– 1 in 250. Second, if you and your tax preparer are not crossing the line, you have little to worry about. In fact, thousands of taxpayers get a check from the IRS at the end of the audit. Don't let a small chance of an audit keep you from taking advantage of every tax strategy for which you qualify.

Do what you love, and you'll never have to work a day in your life, or so the saying goes. It sounds good and feels good, but it's not necessarily true. Sometimes –- often, actually –- doing what you love can be a great hobby but not a good career. There are a lot of things I enjoy that I'll never make a dime doing. A better approach is to find something you enjoy, are good at and that you can get paid to That is the financial trinity you should aspire to find because it ties your interests with your skills with the marketplace

Follow this rule, and I'll send you straight to detention. We know college costs are soaring, and we don't want to bury our kids in college debt, so most parents prioritize college saving over retirement saving. Big mistake. If worse comes to worst, Junior can get a loan, work while in school or go to a less expensive school. Basically, Junior has decent options, and you have tough choices. 

​If you haven't saved enough for retirement, you are stuck. There's very little you can do other than slash your expenses, work longer or both. Save for your own retirement first. That's the financial rule you should follow. If you have amassed so much wealth when your children head off to college that you can afford to help them, go for it. If you haven't, you'd be doing your kids a disservice by jeopardizing your own retirement by paying for their tuition.

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